Wednesday, Sep 24, 2008
Buffett buys a piece of Goldman Sachs at bargain price
Bloomberg: Goldman Gets Buffett Aid in $7.5 Billion Fundraising
GS are desperate and on their knees. A terrified market has withdrawn all liquidity. The great investor knows a bargain when he sees it. ``It's a hell of a deal for Buffett,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. who rates Goldman stock ``market perform.'' ``The key thing for Goldman is making it through the credit cycle, and they're doing the right stuff.''
Posted by mountain goat @ 12:24 PM (300 views) Add Comment
2 Comments
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1. mountain goat said...
This deal is very very expensive for Goldman and risk free for Buffett.
Big Picture says "Vote of Confidence my ass . . . "
"The WSJ subhead read "Move by Famed Investor Amid Crisis Seen as Vote of Confidence in Banking System."
Puh-leeze.
Vote of confidence? Hardly. Doubtful. It is merely an opportunistic deal, and probably a damn good one, for Berkshire Hathaway (BRK). On the other hand, for Goldman Sachs, it is a very expensive deal. If you delve beneath the headlines, you see that Warren is not so much making a vote of confidence as he is extracting pound of flesh (and then some).
Verily, let's look at the details to figure out just how much GS is paying for this capital:
• Goldman Sachs pays a fat dividend to Berkshire Hathaway of 10% on $5 Billion dollars -- that's $500 million per year. And, since this is a preferred, it gets paid out of net income in after tax dollars dollars. Ouch.
• Goldman gets the right to call the preferred at any time at a 10 percent premium. Ouch again.
• Buffett gets $5 billion worth of warrants with a strike price of $115, or about 43.47 million shares. The warrants are good for only 5 years.
If Buffett were to go to the Street earlier today to buy 44 million calls with a $115 strike price (circa 2010), they would have cost him about $1.5 billion dollars. With GS now trading at $135, Buffett’s $5 billion investment is more like $3.5B, in terms of net cost to him. Hence, the 10% interest is more like 14%.
Doug Kass thinks its an even better deal for Berkshire -- goes further than I do, putting an intrinsic value on the warrants of about $2 billion. That makes Buffet's net cost $3B -- so the effective yield is closer to 17%. (Ouch)
A friend points out that Goldie bought back 1.5 million shares in the quarter ending 8/31, at an average price of $180 a share. (Nice trade). I’m thinking the buyback program may be on hold for a while here.
~~~
Bottom line: This is a terribly expensive deal, but probably a necessary one. The smart boys at 85 Broad Street did not want to wait until they were too desperate to get even a mediocre deal. They sure as hell did not want to "pull a Fuld."
This also looks like a steady stream of income for Berkshire Hathaway. And what do you want to bet me that Warren asked for -- and got -- a very serious promise from Bernanke & Paulson that Goldman would under no circumstances be allowed to tank like Lehman? This might even be a riskless deal for Buffett."
2. Stevie Dee said...
Watching Bloomberg - Ben and the Committee. Asked about Warren Buffett and his involvement with GS ($50 Bln), the guy said that Buffett "expects the committee to do the right thing", for who? Buffett Pork Pie and Goldman Sucks, that's who.